One of the growing concerns resulting from Trump's decision to pull the US out of the Iran deal, is that oil - and gasoline - prices will jump so much, now that anywhere between 200kb/d and 700kb/d in Iran exports is taken out of the market, they will offset most benefits to US consumers from the Trump tax cuts. We covered this topic three weeks ago in "Rising Gas Prices Threaten To Wipe Out Trump's Tax Cut Benefits."
Incidentally, that's just one of the less severe complications that could emerge over the next 6 months as the full extent of the new Iran sanctions is rolled out. As we reported earlier, Trump said the U.S. would levy the “highest level” of sanctions against Iran—including the punishment of Western companies and banks if they continue to do business with the country—as Washington pulled out of the Iranian nuclear accord.
And while new contracts are banned, companies and banks will have 90 days or 180 days to wind down their ties before risking penalties.
“Any nation that helps Iran in its quest for nuclear weapons could also be strongly sanctioned by the United States,” Trump said, envisioning a complete paralysis of the Iranian economy. As the WSJ summarizes, financial or business activities outlawed by Aug. 6, Treasury said, include exports of airplanes and parts, dollar transactions, trade in gold and other metals, sovereign debt and auto-industry deals. By Nov. 4, sanctions ban oil purchases, dealings with Iran’s ports and shipping industry, any ties to its insurance sector and dealings with the central bank.
But is the president really willing to alienate any of the countless European and global states that will continue trading with Iran, especially since the latest sanctions cover every major aspect of Iran’s economy, most importantly banning oil exports from the country, but also hitting the financial sector and the automotive and aviation industries.
That's the big question.
Speaking at a press conference after Trump's announcement, Treasury Secretary Steven Mnuchin said that “this administration is resolved to addressing the totality of Iran’s destabilizing activities"
And here something interesting emerged.
Ahead of the Trump sanction announcement, many had speculated that the president is playing hard ball only for purely populist/theatrical purposes, and in reality Trump is exiting the deal only so he can re-enter it, but on his own terms.
Furthermore, the adverse impact to Trump's approval rating that would accompany a surge in gasoline prices would be fat worse than any number of Russian kompromats the NSA can leak to the WaPo/NYT.
And the reality is that both Trump and Mnuchin realize this, and are hardly willing to gamble with Trump's freedom, especially since none other than Trump himself warned that should the Democrats win the midterm elections, that he may be impeached. Yet while Mnuchin said during today's press conference that he does "not expect oil prices to go higher", absent Iranian oil returning fully into the market, it seems improbably that oil will slide right back to $50-60.
So then was today's historic unraveling of Obama's biggest foreign policy achievement just another grand performance by Trump?
One possible sign pointing to "yes" is that Mnuchin said the hiatus before enforcing compliance is to buy time for allies to exit the Iran deals. But much more importantly, it is also meant to get Iran and European allies to back a potential new accord on nuclear development and other activities deemed hostile by Washington.
And, as the WSJ adds, “the wind down periods allow for more than enough time that if there’s not a deal that the sanctions will take effect,” Mnuchin said and added what we believe is the punchline: Trump’s objective in re-imposing sanctions on Iran and threatening to penalize allies "is to enter into a new agreement" even though sanctions will remain in place until the nuke program is stopped. Then again, according to Iran and countless independent observes, Iran's program already is stopped, which means that Trump himself deliberately set up the strawmen so he can then take them down, and upon "revising" the Iran deal, reincarnate the Iran nuclear deal, only this time it will be "Trump's Iran Deal", not "Obama's Iran Deal."
And there you have it: according to Mnuchin, Trump's goal is not to punish and leave Iran out of the global community - while sending the price of oil soaring -but to theaten and pressure. In fact, as the WSJ adds, "just as the Trump administration announced steel tariffs but later provided temporary exceptions for allies, the U.S. is leaving itself wiggle room should its actions prove to be too disruptive or too tough to enforce."
The loophole were also a mile wide: "Mr. Mnuchin said that the U.S. could give exemptions to countries proving they were significantly reducing their purchases from Iran. Treasury didn’t elaborate on what “significant” means."
Finally, addressing the underlying futility of the sanctions, the head of MENA research at MUFG Bank, Ehsan Khoman, said that China, India, Russia and Turkey will likely oppose U.S. sanctions and keep current levels of Iranian crude purchases, even as the occasional U.S. allies - including Japan and South Korea - may comply with U.S. sanctions because of concerns they could lose U.S. security umbrella against North Korea.
Meanwhile, the EU could also escape Trump's retribution and protect its entities operating in Iran by offering non-USD denominated currencies through institutions including European Investment Bank.
“It is unclear whether the potential use of non-USD denominated finance lines will offer much protection to European entities, and thus such a move could be largely symbolic in nature."
Finally, Khoman notes that in a sign of de-escalation, the EU may not reinstate sanctions on shipping insurance, which were “critical in disrupting Iranian crude exports between 2012 and 2016."
In short, Trump's "draconian" sanctions, which will be delayed for months, have extensive loopholes, and allow most of Iran's existing oil trade partners to continue buying oil, may be just a big smokescreen that will allow Trump to say he achieved one more campaign promise. Meanwhile, in reality, both Trump and Mnuchin are doing their best behind the scenes to "enter a new agreement", one which Trump can bring to the masses and say: "here, I took Obama's unacceptable, defective deal, and made it better.... and i also brought down the price of oil too."